Friday, June 12, 2009

I return to this subject to clarify what I think is driving commodity prices. There's been lots of back-and-forth on this in the commentary. People who are skeptical that rising prices signal a recovering economy invariably allege that speculators, fueled by easy money, are driving prices higher, and so rising prices tell us nothing about the health of the economy but a lot about how easy the Fed is and how much inflation (ultimately an economy-killer) we'll have going forward. I've countered that it is difficult for speculators to amass sufficient stockpiles of a lot of the commodities contained in this index. After some brief research I even uncovered data showing that inventories of copper at the London metals exchanges have dropped significantly in recent months even as prices have risen.

In any event, here's how I would describe what has happened with commodity prices:

Global demand suddenly collapsed around September, as fears of a collapse of the global banking system brought markets to a halt and fearful consumers stopped spending on nonessential items. To make matters worse, banks stopped making letters of credit, and that shut down global trade. The global economy basically hit an air pocket as demand fell off a cliff. Producers soon found themselves with rising inventories as demand fell, and so they cut back production and prices fell. They cut production by a lot, fearful that the global economy was going into a depression. Early this year things started to normalize and demand stopped falling. World trade resumed after banks once again figured out how to write letters of credit. Demand proved to be stronger than everyone had feared. Production of commodities was slow to react as inventories began to drop, so prices started to rise. Higher prices today are surely encouraging commodity producers to ramp up production. Sooner or later production will rise enough to keep prices from rising to the stratosphere. Commodity speculation has likely played a role in rising prices in the past month or so, since confidence has returned, equity prices have boomed, but the Fed has yet to take steps to reverse its liquidity injections, thus creating rising inflation expectations.

I say again that rising commodity prices are an excellent indication that things are getting back to normal, and that growth is returning. Easy money may drive prices into another bubble, but if so we are still in the early stages. The important thing is that demand is back and production is undoubtedly ramping up in response to higher prices.

17 comments:

President Obama faces THE MOST DIFFICULT economic issue ever to confront an American President.

Throughout our nations history, we have been a nation where the PRIVATE economy generated sales and profits and supported our government and its currency. As time passed our private industry grew and so did our government......but a few decades ago our private side failed to keep up with the growth of government and government grew and grew and grew becoming a more important part of the economy as each year passed.

Right now our total government speding is about $6.5 Trillion dollars........about half of our GDP.

http://www.usgovernmentspending.com/index.php?year=2009

Unfortunately, after popping the debt bubble of the last ten years....our private economy is simply too small to sustain a government with $6.5 Trillion in spending.....and that spending drives our entire economy including health care, defense, and welfare which drives trillions into the private sector.

As a nation, we are now only generating about $3.5 to $4 Trillon dollars in tax revenues......and a HUGE gap is forming......and the outlook for the gap to widen is almost assured with an aging populuation and more and more becoming un/underemployed.

HERE IS PRESIDENT OBAMA'S MASSIVE PROBLEM:

If government slowed spending to match receipts, our nation, and the world, would immediately implode into the biggest depression in history.......if government keeps spending money it doesn't have......our currency will collapse as few will want to deal with a country that produces very little and has such a MASSIVE social welfare spend while their own citizens are living at a much lower standard.

In sum, our President has two choices.......a depression where we restructure and start over or hyperinflation with a depression where our currency is worthless and nobody can afford to fill up their cars with gas unless they live outside the U.S...

Over half of federal government spending is transfer payments: they take money out of one person's pocket and put it into another person's pocket. I don't see why this couldn't be unwound without causing the economy to implode. Transfer payments are a zero-sum game; they don't create any new demand, they only make spending less efficient and the economy less vibrant than it could otherwise be.

Government spending doesn't create inflation, only the Fed does. The government could continue to spend with great profligacy, but the Fed doesn't have to allow that spending to create inflation.

So I am not compelled to accept that there are only two or three awful choices facing us.

Now a HUGE percentage of the revenues will be forced to come from borrowing as tax receipts are evaporating across all catagories.

In the past ten years, a HUGE percentage of government revenues came from profits generated from private sector borrowing and the massive debt bubble that was created.

Now that all assets have been leveraged out.....there no more private sector bubbles left to inflate as evidenced by massive bankruptcies, 300K foreclosures per month, California's record tax revenue drop, 600K NEW people per week filing for unemployment with little prospect for replacement employment....just to name a few.

Once the government stops spending due to unsustainable interest rates as few will be willing to finance our debt with little productivity supporting it.....prepare for Zombulation.

To paraphrase Milton Friedman, the problem with government spending is not how its financed, its with how large the spending is. Transfer payments funded by borrowing are not appreciably different from those funded by taxes.

Borrowing is not necessarily bad either. If the government told you that it wanted more money from you so it could make transfer payments, which would you choose: 1) pay higher taxes or 2) buy government bonds?

If you buy bonds, at least you have the hope of getting your money back some day.

If the government slashed spending programs that would be cause for celebration in my books.

"If government slowed spending to match receipts, our nation, and the world, would immediately implode into the biggest depression in history......."

This is nonsense on stilts. Matching spending to receipts would wash out massive inefficiency and waste, and reduce expectations of higher future taxes, which would spur private spending and investment. Furthermore, the risk of higher rates and a weaker dollar would be mitigated. Obama IS NOT b/t a rock and a hard place. If the government slashed spending and explicitly froze or cut taxes the economy would soar.

You are absolutely right....borrowing is not necessarily bad.....if you have the capacity to borrow and use for the capital.

But right now, there is little capacity left in the private sector and those than can borrow have little use to deploy the capital....anywhere.

Borrowing money without a productive capacity only makes the borrower a high risk driving up interest rates.

Right now, private borrowing is basically dead......and the primary borrower is government....

Unfortunately, as we don't produce much any more we are borrowing simply to transfer money so our citizens can spend at our business to create an illusory economy.

If I loaned a homeless alcholic $100K knowing he would never pay me back.....for the period of time that the person spent the money, the businesses where he spent would benefit and the liquor store would think the economy was booming.....but after the money was gone......the spending would stop unless he could borrow more money or get a job(productivity).

Right now our private economy is in the tank burdened by a debt level never seen in history. It is simply suffocating trying to service interest payments.....you and I really know this is reality.

With no private economy....there can be no revenues to government on a sustainable basis without printing out of thin air....

Every nation in history....that is every nation without exception.....has imploded to total economic chaos walking down that path.....this time we are running.

I developed Alstrynomics a few years ago once I realized that our economy was simply one big Ponzi Scheme of bubbling up a private sector(with decreasing productivity) to support a growing government which in turn drove the private sector growth even further creating a positive feedback loop benefiting many.

Once you cut off the private sector from bubbling up...the public sector would fall shortly. We are now in that process which I call Concentric Contraction.

Economics, as traditionally practiced, simply was not prepared to deal with issues that it never contemplated.

I can understand your reluctance to accept what is coming...but soon you too will come around...I am quite confident of this.

In a few weeks, California will have to deal with a massive structural problem....I think you might be surprised by the outcome....

And if you find a good deal on an island when you start looking....please share it with the rest of us;)

Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.

"The real question is not whether these cities shrink – we're all shrinking – but whether we let it happen in a destructive or sustainable way," said Mr Kildee. "Decline is a fact of life in Flint. Resisting it is like resisting gravity."

Karina Pallagst, director of the Shrinking Cities in a Global Perspective programme at the University of California, Berkeley, said there was "both a cultural and political taboo" about admitting decline in America.

Can you imagine all the green shoots that are going to sprout up when all those homes get bulldozed.

Then once we kick out those 5 million homeowners who can't make their mortgages.....we are guaranteed to have more green shoots than ever.

Scott,

As I told you before....it will not be long before you abandon Economics for Alstrynomics....because Alstrynomics is a fact based approach to seeking the truth and being right....where Economics is a discipline about telling you what you want to hear.

It is the month of August, on the shores of the Black Sea . It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.Suddenly, a rich tourist comes to town.He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to pick one.The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.The butcher takes the 100 Euro note and runs to pay his debt to the pig grower.The pig grower takes the 100 Euro note and runs to pay his debt to the supplier of his feed and fuel.The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town’s prostitute who in these hard times, gave her “services” on credit.The hooker runs to the hotel and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.At that moment, the rich tourist comes down after inspecting the rooms and takes his 100 Euro note saying that he did not like any of the rooms and leaves town.

No one earned anything; however, the whole town is now without debt and looks to the future with a lot of optimism.

And that, ladies and gentlemen, is how the United States government is doing business today.

All debts are owed to the butcher....who by the way owns a very sharp knife;)

And the butcher is shutting down millions of businesses, firing or cutting the wages of tens of millions of Americans, kicking millions out of their homes leaving many homeless, bulldozing their neighborhoods because they are no longer econimcally viable, shutting down their schools and firing their teachers, cutting off their health care by terminating workers in their hospitals by the thousands....

great stuff and great pic. it's time to smash the crazy deflaters once and for all and start factoring in the impact of etf's in your grwth numbers. china really is a nothing next to these guys. fink may be about to become the most powerful finance guy in world history-and that includes some big names. these etf'ers are the new, new thing and they are driving the whole WORLD'S economy into a massive new growth and profit wave. amazingly it's being done without banks which have now been foisted on the taxpayer and are nothing more than a utility. to me this whole so called collapse was nothing more than a bunch of nyc bankers who saw they were losing and wanted a do-over courtesy of u and me. it appears they got some of it! keep up the xcellent work.

thudbear: your stimulus story is intriguing. If anything, it illustrates how debts can be cancelled/wiped out without affecting the physical economy. We've wiped out many trillions of debt this past year, yet the economy's infrastructure, our manufacturing capital, and the talents of our workers are still intact.

Are you smoking those green shoots???? Because based on today's data such as record credit card defaults, Extended Stay not getting an extension, deteriorting NY manufacturing, decreasing HB confidence, etc.......